The core elements of accounting define the structure of financial recording under the double-entry system. They explain how transactions are recorded (Debit and Credit) and how financial results are classified (Assets, Liabilities, Income, and Expenses). Together, they ensure systematic recording and balanced accounting records.
Debit
Debit refers to the left-hand side of an accounting entry and is used to reflect increases in assets or expenses and decreases in liabilities or income. In every transaction, there is at least one debit and one credit. The debit shows where the value is going or what is being received. It plays a central role in maintaining balance in the double-entry system.
- Increases assets and expenses.
- Decreases income and liabilities.
- Recorded on the left side of accounts.
- Must always be matched with a credit.
Credit
Credit refers to the right-hand side of an accounting entry and is used to represent increases in liabilities or income and decreases in assets or expenses. It works alongside debit to complete each transaction. A credit shows the source of the value or what is being given. Accurate use of credit ensures the double-entry system remains balanced.
- Increases income and liabilities.
- Decreases assets and expenses.
- Appears on the right side of entries.
- Works with debit to keep books balanced.
Assets
Assets are economic resources that are owned and controlled by a business, which help in generating income or offering services in the future. These can be physical like land, or intangible like patents, and reflect the business’s strength. Assets are essential for daily operations and long-term growth. The value of assets represents what the business possesses at any given time.
- Examples: Cash, stock, equipment, goodwill.
- Help in running operations or earning income.
- Categorized into current and non-current
- Owned and controlled by the business for future benefits.
Liabilities
Liabilities are financial obligations or debts owed by a business to other individuals or institutions. They arise from past transactions and are settled through cash or services in the future. Liabilities indicate the amount a business is answerable for and must repay or fulfill. The existence of liabilities reflects the company’s obligations and funding sources other than owner capital.
- Examples: Bank loans, creditors, outstanding bills.
- Represent duties to be fulfilled by the business.
- May be short-term or long-term in nature.
- Reduce the net worth or equity of a business.
Income
Income is the amount earned by a business through its normal operations or other activities like interest or rent received. It is the inflow of money that adds to the value of the business and contributes to profit. Income helps sustain and grow the business by covering expenses and generating surplus. It is an indicator of how well the business performs financially.
- Examples: Sales, commissions, interest received.
- Supports business growth and capital increase.
- Earned from both core and other activities.
- Measures the profit-making ability of a business.
Expenses
Expenses are the costs incurred by a business for its operations, such as paying salaries, rent, or buying materials. They represent the outflow of resources used to earn revenue or maintain the business. All expenses reduce the profit and must be recorded in the correct period. Managing expenses effectively is important to maintain financial health.
- Examples: Wages, electricity, advertising, repairs.
- Incurred to run or expand operations.
- Directly reduce the net income of the business.
- Classified as operating and non-operating